Thursday, August 29, 2019

Arguments in favour of foreign investment

Arguments in favour of foreign investment The positive developmental role of domestic and foreign investment on economic growth in host countries is well documented in literature. Investment is usually directed in sectors that enjoy comparative advantage, thereby creating economies of scale and linkage effects and hence raising productivity. An important argument in favor of foreign investment is that it consists of a package of capital, technology management, and market access. For foreign investment, repayment is required only if investors make profit and when they make profit, they tend to reinvest their profit rather than remit abroad Zakaria M (2008). Reviewing the investment policies of Pakistan over the last six decades he observes that during 1950s and 1960s the private sector was the principal vehicle for industrial investment in the country and the role of the public sector was curtailed to only three industries out of 27 basic industries. By late 1960s the economy was mainly dominated by the private sector in imp ortant areas like banking, insurance, certain basic industries, and international trade in major commodities. During 1970s, government nationalized commercial banks, development financial institutions, insurance companies and ten major categories of industries. There was also acceleration in the direct investment by the public sector in new industries, ranging from the basic manufacture of steel to the production of garments and breads. After the miserable performance of the industrial sector following the nationalization process of the 1970s, a change occurred in the government’s approach toward the role of the public and private sectors. In 1980s, government decided to pursue a pattern of a mixed economy, with the private and public sector reinforcing each other. Despite various incentives, the highly regulated nature of Pakistan’s economy proved a restraint to the inflows of foreign investment. Specifically, foreign investment was discouraged by (a) significant publ ic ownership, strict industrial licensing, and price controls by the government; (b) the inefficient financial sector with mostly public ownership, directed credits, and segmented markets; and (c) a noncompetitive and distorting trade regime with import licensing, bans, and high tariffs. During 1990s government started to apply the same rules and regulations to foreign investors as to domestic investors. The requirement for government approval of foreign investment was removed with the exception of a few industries (arms and ammunition, security printing, currency and mint, high explosives, radioactive substances, and alcoholic beverages). During 2000s government based its investment policies on the principle of privatization, deregulation, fiscal incentives and liberal remittance of profits and capital. The policy is based on promoting investment in sophisticated, high-tech and export-oriented industries while almost the entire economic activity in other fields, encompassing agricu lture, services, infrastructure, social sectors, etc. have been thrown open for foreign investment with identical fiscal incentives and other facilities, including loan financing from local banks. Shahbaz and Khalid (2004) find that investment is considerably responsive to domestic saving, yield and uncertainty in Pakistan. Return on investment is an important determinant of investment in the country. Its role in investment decisions-making carries such a weight that it outweighs negative impact of increased rate of borrowing. Expectations and uncertainties play a major role in investment decisions in Pakistan. Whereas domestic saving is a major source of investment, foreign saving is not effective for investment in Pakistan. Tewolde H (2008) argues that the decision to invest resources is one of the significant drivers of the business financial system. Sound investments that implement well organized strategies are important to creating shareholders value, and must be analyzed both in proper context and sound analytical methods. Whether the decision involves committing resources to new facilities, a research and development project, marketing program, additional working capital, an acquisition, or investing in a financial instrument, an economic trade off must be made between the resources expended now and the expectation of future cash benefits to be obtained. In other words, investing is incurring costs in order to gain benefit during the estimated life of the plant assets or current assets in the future. Bandoi and Berceanu (2008), observe that investment decision is a very difficult for leaders of all firms. By its very nature, the decision affects the investment a company a long time horizon, if not forever. In the idea of adopting an investment decision we can use simple criteria or criteria based on discounting. Of the latter category, net present value criterion (NPV) is most often used. They further argue that inflation is a real fact today which can not be ignored. Their result highlight the fact that if effects of inflation are not taken into account we can do wrong analysis of capital budgeting.

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